Stephen Williamson has turned his attention to something other than carping over Krugman the last few days, instead he's been questioning NGDP targeting. It is very tough to figure out where he himself is coming from it's true.
In his second post-his first was enough to rouse up Sumner from his 6 day sabbatical-he reiterates a point he made in the first post about how nobody says we have to smooth NGDP between the seasons-if for example the Summer has higher NGDP than the Fall no one worries about this being instability.
"My point in looking at seasonally adjusted nominal GDP was to point out that fluctuations in nominal GDP can't be intrinsically bad. I think we all recognize that seasonal variation in NGDP is something that policy need not be doing anything to eliminate. So how do we know that we want to eliminate this variation at business cycle frequencies? In contrast to what Sumner states, it is widely recognized that some of the business cycle variability in RGDP we observe is in fact not suboptimal. Most of what we spend our time discussing (or fighting about) is the nature and quantitative significance of the suboptimalities. Sumner seems to think (like old-fashioned quantity theorists), that there is a sufficient statistic for subomptimality - in this case NGDP. I don't see it."
I do think that's a good question, a question that Market Monetarists never answer, namely, why is stable NGDP always optimal in welfare terms?
Lars of course is having none of this and writes a response to Williamson that proclaims "The Fed Can Hit Any NGDO Target."
Of course it can, it's Chuck Norris and Chuck Norris can do anything. Lars does make a fair point:
"Williamson claims that he does not agree with everything Friedman said, but I wonder what Friedman said he agrees with. If you don’t believe that NGDP is determined by the central bank then it makes absolutely no sense to call yourself a monetarist."
I certainly have no idea why he calls himself a "New Monetarist" or what that even is. SW does give an answer:
"Randy Wright talked me into it. It's as good a name as any. We like some things about Milton Friedman, but some things we don't like - 100% reserve requirement, his need to separate assets into money and not-money. We're a lot more interested in theory too."
Well it's tough to like his 100% reserve requirement, however, SW still gives us no clue why he's a New Monetarist. With all the talk that MMers don't provide any kind of transmission mechanism, Lars suggests one here-the "exchange rate channel." No surprise that he mentions the Swiss experience-all MMers do and of course he himself is Swiss- with currency devaluation as exhibit A of the kind of heavy lifting monetary policy can do:
"Therefore there is certainly no reason to 1) argue that the Fed can not hit any NGDP target 2) that the Fed does not have an instrument. The exchange rate channel can easily do the job. Furthermore, if the Fed announces this policy then it is very likely that the market will be doing most of the lifting. The dollar would automatically appreciate and depreciate until the market expectations equate the NGDP target."
Of course even the Swiss currency experiment has it's naysayers as well.
There are some who argue that the Swiss experience does not buttress the Market Monetarist idea that the market will do most of the heavy lifting as they claim that the Swiss central bank had to do a lot more legwork than simply announce a target.
"The ‘psychological shock’ of Wednesday’s moves by the Swiss National Bank to stem the rapid rise of the franc is already wearing off — at least in the FX market."
"Here, via Deutsche Bank’s Alan Ruskin, are five reasons why it was never going to have anything more than a transitory effect."